As I type this post, the President is proposing once again drilling in ANWR, noting the “enormous” benefits. [1] [2] [3] I’d like to just note the analysis his Administration’s DoE just published last month.
From Analysis of Crude Oil Production in the
Arctic National Wildlife Refuge, published May 2008:
Summary
The opening of the ANWR 1002 Area to oil and natural gas development is projected to increase domestic crude oil production starting in 2018. In the mean ANWR oil resource case, additional oil production resulting from the opening of ANWR reaches 780,000 barrels per day in 2027 and then declines to 710,000 barrels per day in 2030. In the low and high ANWR oil resource cases, additional oil production resulting from the opening of ANWR peaks in 2028 at 510,000 and 1.45 million barrels per day, respectively. Between 2018 and 2030, cumulative additional oil production is 2.6 billion barrels for the mean oil resource case, while the low and high resource cases project a cumulative additional oil production of 1.9 and 4.3 billion barrels, respectively.
Crude oil imports are projected to decline by about one barrel for every barrel of ANWR oil production. Opening ANWR results in the lowest oil import dependency levels during the 2022 through 2026 time frame, when oil import dependency falls to the minimum values of 46 and 49 percent for the high and low oil resource cases, respectively. During that timeframe, the mean resource case and AEO2008 reference case project an average oil import dependency of 48 and 51 percent, respectively. Because ANWR oil production is declining after 2028, U.S. oil dependency rises to 51 percent in 2030 in the mean resource case, compared to 54 percent in the AEO2008 reference case. The high and low resource cases project a 2030 oil import dependency of 48 percent and 52 percent, respectively.
Additional oil production resulting from the opening of ANWR improves the U.S. balance of trade. Cumulative expenditures on foreign crude oil and liquid fuels between 2018 and 2030 are reduced by $202 billion dollars (2006 dollars) in the mean oil resource case and reduced by $135 and $327 billion dollars in the low and high oil resource cases, respectively.
Additional oil production resulting from the opening of ANWR would be only a small portion of total world oil production, and would likely be offset in part by somewhat lower production outside the United States. The opening of ANWR is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light crude oil prices of $0.41 per barrel (2006 dollars) in 2026 for the low oil resource case, $0.75 per barrel in 2025 for the mean oil resource case, and $1.44 per barrel in 2027 for the high oil resource case, relative to the reference case. [Emphasis added – MDC]
The message of the report is in large part summarized by these two graphs:
Source: Energy Information Administration, Analysis of Crude Oil Production in the
Arctic National Wildlife Refuge, May 2008.
Source: Energy Information Administration, Analysis of Crude Oil Production in the Arctic National Wildlife Refuge, May 2008.
So, I think these calculations put into context what drilling can do. For your reference, below is the nominal and real (2006 prices) price per barrel of West Texas Intermediate.
Figure 1: Nominal (red) and real (blue) price per barrel of WTI. Real calculated using CPI-All. Source: St. Louis Fed FREDII, and author’s calculations.
It’s true that increased supply, ceteris paribus, should decrease prices. How much is as relevant as which direction prices would move (and, of course, as reader Buzzcut admonishes us, the opportunity costs as well, to which I would add that externalities should be taken into account).
Note the offshore drilling component of the President’s proposal is congruent with McCain’s. Fortunately, a holiday for the gasoline tax, which works in the wrong direction for reducing energy dependence, has dropped off the table. One has to be thankful for small blessings.
Technorati Tags: oil prices,
ANWR,
Arctic National Wildlife Refuge, oil imports,
externalities.
Insightful post. It appears you’ve flipped the labeling for real and nominal prices on the oil graph, though.
cure: Thanks for catching that. Fixed now.
This is a disingenuous argument.
I mean, by the same argument, you could say that the Toyota Prius is a waste of time, becuase at 150k per year, even at 50 mpg, it just doesn’t make a big enough difference in total gasoline usage to change the energy dynamic.
No one is saying that ANWR is the total answer. It is one step among many. But undoubtedly, there is a crisis in production, ANWR has oil under it, and drilling should be allowed there to increase world production, however insignigicantly you might think it is.
And isn’t the flip side of price inelasticity that small increases in production can cause a huge decrease in prices?
Once again, I’m surprised that an economist wouldn’t acknowledge that prices are set at the margin…
Wouldn’t you think the psychological effect could indeed be enormous, given that much of the oil price now is psychologically driven?
Thanks for the shout out, by the way, Menzie.
What do you think the opportunity costs are? I mean, who is going to develop ANWR? Exxon or BP or someone of that nature, more than likely.
What are their other production opportunities?
Exxon’s CEO said to that Congressional Commitee that he doesn’t have a lot of other opportunities because of all the national oil companies out there that own production rights in most places.
So, really, for BP or Exxon, it’s ANWR or nothing.
Unless we want to start invading countries for the sole purpose of disolving their national oil companies and opening their territory to open competition, the future of the multinationals is not very bright.
But seeing as how we didn’t do that in Iraq… One wonders why there is still an Iraqi national oil company and why the multinationals aren’t the ones pumping oil in Iraq.
It’s the plummeting dollar, not so much supply/demand, that fuels this current speculation. Goldman Sach, other Wall Street investment banks, and its army of hedge funds are gaming the commodity market. Fed’s easy money (short-term objective of saving the investment banks at the expense of long-term built-up inflation) is being funneled into commodity, driving the dollar down even further, defeating its own purpose. The Fed is cornered.
Buzzcut: The elasticity estimates are built into the EIA’s models. I’m not ignoring elasticity estimates, I’m incorporating expertise in my argument.
Regarding Iraq and oil, I believe the oil law passage (one of the objectives of the surge was to establish the preconditions necessary for its passage, if you recall) would facilitate MNC investment in the oil sector. So…I agree, this particular benchmark for the surge (political reconciliation to allow passage of this law) has not yet been achieved. But that’s not to say this is not in the minds of many as a key objective of some in the Administration.
Opportunity cost…instead of subsidizing exploration and exploitation via tax incentives and subsidies, how about spending some of those resources on R&D in energy efficiency or basic science.
Opportunity cost…instead of subsidizing exploration and exploitation via tax incentives and subsidies, how about spending some of those resources on R&D in energy efficiency or basic science.
Well, that doesn’t do anything for Exxon and all its profits. What does it reinvest its money in? It has no special expertise in alternative energy, and that would be a very poor reinvestment.
And what tax breaks would it get for going into ANWR, anyway. If anything, Exxon would be paying royalties (which is why the Alaskans want ANWR opened).
I’m working on a blog post of my own about this, but if the people who wanted to drill offered the environmentalists 10% of the revenue from the oil they sell, the greens would have a hugely massive pile of money with which to do their Good Things: about $100 billion, after buying carbon credits and cleaning up.
Coasian economics, baby.
Funny Menzie should mention the Prius. The argument has been made that the Prius is a wasted effort: likely buyers mostly already drive a fuel-efficient car and so they are seeing only a modest gas savings.
And talk about externalities: global warming anyone?
The real variable missing in this is production costs and, as I pointed out in the previous non-discussion of this issue, the fact that production costs are very much dependent on whether the oil companies are allowed to socialize the costs to everyone else.
In Florida, for example, Republicans very sensibly oppose offshore drilling, because their tourist industry is dependent on having oil-free beaches, marlin, etc. The oil companies want to be free to drill and spill. Now, the solution economics would propose is to assess the oil companies a sum that matches the costs to the tourist industry of whatever they spill. Under those conditions, oil production would not be profitable.
The amount of technically recoverable oil in the US that could be produced at anywhere near the real cost is very small relative to world production. The amount of oil we could easily recover by conserving is far larger.
The oil companies are raging socialists, redder than Soviet industry ever was, charging us for the costs they impose and delivering the profits to themselves.
Joe: Clarification — Buzzcut mentioned the Prius, not me.
The amount of technically recoverable oil in the US that could be produced at anywhere near the real cost is very small relative to world production.
We are still talking about a lot of money. There is probably over a trillion dollars of the stuff under ANWR.
Which is why I say “give the greens 10% of the revenue.” Is a totally virgin ANWR really worth $100 billion to them, especially compared to all the things that could be done with 100000000000 dollars?
The question is whether this would just delay the inevitable transition at higher total cost later. Going forward may be less costly than backwards.
Hmm. The Saudis in total produce 9.5 million barrels/day currently, according to another recent post here. World production is in the neighborhood of 85 million barrels/day. Are all the elasticities such that .5 million or 1.45 million extra barrels/day from ANWR only reduces the cost of a barrel by $.75-$1.50? Is this analysis performed by assuming that the elasticities are near 1? I’m not sure that that’s true; if elasticity of demand is low, then it seems like a small increase in production would have a much larger effect on price.
Jim Hamilton said: “The loss of 1 million barrels per day of Saudi production between 2005 and 2007 was one of the single most important factors in the run-up in world oil prices over the last several years.”
Yet the addition of 1 million barrels per day of ANWR production would have little effect? I’m confused, but I suppose it’s explainable by the Saudi drop making people think that the Saudi reserves were running out.
First off, apparently some people don’t understand the word “priceless”. ANWR, not only for its aesthetic beauty, but also for its biodiversity and its value as a buffer for pollution we’ve released all over the planet, is priceless. It’s worth well over 100 TRILLION dollars.
Second, there is little serious intent of actually exploiting the petroleum reserves in ANWR. Offshore leases for most of Alaska’s north coast have been signed, yet no oil companies are currently exploiting those leases (nor are there plans to). The whole ANWR thing is just another conservative whining point, as with the current myth about China drilling off the Florida coast.
Zero percentage of any profits should go to environmental organization. Environmental organizations should be sent a bill for the wind, solar, and nuclear energy they protest against.
The US could be 100% energy independent.. but no. Want to point a finger at anyone for the massively higher cost of energy? Point a finger at the environmentalists who protest against nuclear, wind, and solar plants.
As for ANWR, it should be just one piece of US drilling.. our eastern seaboard should look like the North Sea. But it can’t be business as usual — in 20 years those wells are capped, and in that time we develop our alt-energy sources.
Carter’s “moral equivalent of war” speech was 110% correct.
The oil companies want to be free to drill and spill.
I don’t think that that’s the problem that it once was. There were no spills during Katrina, for example.
I also think that we’re talking deep water exploration off of Florida. If the rig is 100 miles offshore, or whatever, is it really a threat to beaches?
Beaches in Galveston and South Padre seem to be doing pretty well despite being on the Gulf.
I’m not sure that that’s true; if elasticity of demand is low, then it seems like a small increase in production would have a much larger effect on price.
That was exactly my point. To which Menzie’s reply was an appeal to authority.
Who are we mere peons to question the EIA estimate of price elasticity?
Second, there is little serious intent of actually exploiting the petroleum reserves in ANWR. Offshore leases for most of Alaska’s north coast have been signed, yet no oil companies are currently exploiting those leases (nor are there plans to).
This is actually the only valid point against ANWR.
I do dispute that there are no plans to exploit those leases. $140/ barrel oil may change many plans, as will declining reserves of the majors.
But it may very well be true that, had Clinton not vetoes the ANWR bill in ’98, ANWR still would not have been developed. Oil was $10/ barrel in ’98.
But it can’t be business as usual — in 20 years those wells are capped, and in that time we develop our alt-energy sources.
I do agree with one thing that the conservationists are saying. Perhaps if we really did develop all our conventional domestic resources, it would drop the price of energy to the point that development of alternative energy would be impaired.
Nothing has focused the development of alternative energy as much as high oil prices. Now that people can MAKE MONEY at alternative energy, these dreams that people have had since the ’70s are finally coming to fruition.
ANWR, not only for its aesthetic beauty, but also for its biodiversity and its value as a buffer for pollution we’ve released all over the planet, is priceless. It’s worth well over 100 TRILLION dollars.
Yeah. Could we all see the spreadsheet on that calculation?
ANWR is pretty worthless. It had it’s most visitors in 1990, when they got about 900 visitors that year. It is NOT the Grand Canyon, as McCain has said. And even if it is, there used to be uranium mining in the Grand Canyon!
Charles-
Could you provide the top five oil spills (caused by drilling) with costs to clean up? Names and numbers, please.
So, Dave, if you woke up and found that there had been an oil drilling rig in ANWR, and you had $100 trillion that could totally restore it, you would spend that $100 trillion on 100% restoring it rather than on doing buying up land to create massive wildlife reserves, giving healthcare and education to all Americans, funding solar and wind and wave and fusion power, and perfecting the electric car?
“The US could be 100% energy independent.. but no. Want to point a finger at anyone for the massively higher cost of energy? Point a finger at the environmentalists who protest against nuclear, wind, and solar plants”
Wrong. Ignorant posts like that are embarrasing and show your weak-minded nature.
The reason why the US doesn’t “drill” is because nothing we could do what be as efficient or good as sweet crude right now. We simply don’t have the tech. It is the environmentalists who long have tried to push solar and wind. Yet, they have been blocked. Lying isn’t necessary. If the US had pushed non-fossil fuel energies in 1980 like they wanted to, we may have had cold fusion right now(we already are much farther along than the government lets on).
ANWR won’t be drilled anytime soon. The type of oil it has, will not help us anytime soon.
The fact is, we have a gob of sweet crude still left in the middle east. We are just waiting for the prices to come down.
We should be saving all the oil we can however, we use it more than powering you fat rides.
Can we just call ANWR the “US strategic crude oil reserve”? Because that’s what it is – and you idiots would drill it to lower prices a little bit for the whole world (the only way it would have a major impact on our OWN prices is if we nationalized ‘our’ oil companies and required them to sell to US customers at a discount).
Some day down the road, when there’s not enough oil to export at any feasible price or fungbility breaks down due to a war or some other cause, we might wish we’d saved our ‘strategic reserve’. But of course, Buzzcut wants to drive his SUV and if the liberals are agin’it, he’s fer.
Menzie_Chinn: Well, I’m glad to finally see some Econbrowser graphs that actually *are* plotted with the zero on the y-axis visible, but in this case, it only seems to be because you want to trivialize a change in a variable.
Come on, James_Hamilton! Do a response! Plot the same graphs, but like, start the Figure 3 thing from 40%.
M1EK, in order for ANWR to be a strategic reserve, we’d need to drill it now to get ready. A reserve that takes 10 years to get online isn’t really strategic.
I’m not really sure that drilling ANWR would have an effect on prices; however, it is a very valuable asset for the US, and the time to sell is when the asset is high in value. (And it’s well valuable enough that carbon offsets can be purchased for a fraction of its value.) The US shouldn’t just let the oil companies in at bargain-basement prices; it should negotiate maximum value for those drilling rights.
How expensive do you think oil can get? Remember, with enough energy we can manufacture hydrocarbons, and there are other sources of energy besides oil, like nuclear, that can supply that energy.
Silas Barta (formerly Person): I apologize for offending your aesthetic sensitivities. Just so you know, Figures 2 and 3 are directly cut and pasted out of the EIA document, so I cannot take credit for starting at 0%. On the other hand, when I do not start at 0, I try to express things in logs so that the reader can do the percentages in their head. Hopefully.
“… the 2022 through 2026 time frame, when oil import dependency falls to the minimum values of 46 and 49 percent for the high and low oil resource cases, respectively.”
Claiming to have a good estimate of oil use in 2026? Thats 18 years out.
Dan, there is no process out there which can generate fuel like petroleum without spending far more energy in the process than it’s worth. And no, there’s not that much nuclear material in the world. Economics doesn’t trump thermodynamics.
Yes, leaving it in the ground is as close as you can get to a strategic crude reserve. Nobody’s going to be willing to build the drilling infrastructure without being allowed to pump it out and make the money back.
Note that I’m not using the term the way many SUVaholics would – as a mechanism to keep us driving if prices get too high. This is a reserve so we can fund a transition to another energy source in a last-ditch effort if fungibility collapses. And again, no, making hydrocarbons from nuclear power isn’t going to be that source.
Th ANWR oil has an higher production cost than Saud oil.
I think that by increasing the cost of money and boosting investment on renewable energy we catch the target.
Wouldn’t it just be easier to take over a Middle Eastern state and just grab the oil? Say, one that was producing about 3.7m barrels a day. Oh, wait, we tried that – damn, that didn’t work out.
Damn those crooks at Los Alamos! And the New York Times‘s science editor isn’t as smart as you!
So how much uranium do you think is available?
No it isn’t. It’s not a “strategic” reserve if you need ten years to get to it. A strategic reserve is something you can access quickly.
I don’t think we should use it for that, either. The main purpose of selling oil now is portfolio rebalancing: all the oil we have in the ground is very valuable, and so we should sell it off.
So do you think that $100 billion would work?
Getting serious, there is no fuel out there, not even in theory, that can continue the American suburban ‘dream’, if you define it as being able to drive big vehicles to/from exurbs with only one person in them.
Batteries will never be able to store energy densely enough while maintaining a long enough life. Some of that is defined by the periodic table itself. Good luck fixing that with economics. You might be able to drive something like the old EV1 with an increased range but lower lifetime use (despite what you hear, nobody’s yet been able to make lithium-ion last ‘the life of the vehicle’ like Toyota did for NiMH in the Prius). So you can keep the miles if you give up the space and increase the lifetime cost dramatically (replace your battery every few years like cell phones).
Biofuels are a joke when you consider they’re an attempt to burn one lousy years’ worth of solar energy; petroleum is actually thousands of years worth of said energy which was helpfully pre-compressed for us over time.
Fuel cells are a joke. Nice theory, but not going to cut it in the real world for far too many reasons to mention.
Electrified mass transportation is the only solution that can work – but it requires remaking some suburbs and abandoning many others (those that cannot feasibly be served with even bus transit, which is, sadly, most of them). Buses have a high enough potential efficiency to be worth running with or without the mythical battery breakthrough, but they’ll never be able to pick up enough people in cul-de-sac land to make them a going prospect. Rail transit is of course the way to go – and why if I had the money and the skills and the connections, I’d be betting on a flip of the competitive landscape in favor of Western Europe and Japan.
Those who think that there’s a fuel solution out there if we just clap our hands hard enough should realize that we (the US, anyways) are most likely just an example of survivorship bias. Just because petroleum displaced horse/wood/whale doesn’t mean something will conveniently come along with enough energy density and usefulness to displace petroleum when we need it.
Menzie_Chinn: “Not wanting changes to be made to appear deceptively large” is not an “aesthetic sensitivity” and it’s certainly not unique to me, nor a strange request. Just: “Hey, don’t use a technique that could make a .00001% change in GDP look like all-out economic collapse.”
I understand you didn’t make these graphs, and neither did James_Hamilton make the ones I criticized, but by passing them on, you bear some responsibility for whatever deception, if any, results thereform.
The opening of the ANWR 1002 Area to oil and natural gas development is projected to increase domestic crude oil production starting in 2018.
That’s about the point where they lost any support I might have had for the project. If we start now, we can spend a pile of cash, muck up a nature reserve, and in a decade (if all goes to plan) we will have started produce something.
I suspect that if you put the same money and effort into alt-energy research you would see results a bit sooner than ten years from now.
ANWR’s Impact on Oil Prices
Even if Congress agreed to open the coastal plain of the Arctic National Wildlife Refuge (ANWR) to oil production this year, it would take something on the order of 10 years before oil began to flow through the pipeline – and that’s in the absence of s…
“The amount of technically recoverable oil in the US that could be produced at anywhere near the real cost is very small relative to world production.”
If it is such a small thing, then lets let them have at it Charles. Why not?
Someone asked for a list of oil spills. FWIW:
http://dailykos.com/storyonly/2008/6/18/16358/9014/1003/538017
(scroll to bottom)
http://digbysblog.blogspot.com/2008/06/you-know-drill-by-dday-so-john-mccain.html
Sandman ANWR is not a strategic reserve. The vast majority of people against drilling there sight environmental reasons and are very adamant about never drilling there, ever. It is not a reserve now nor can it be unless a new law replaces the current one. I have never seen or heard of any movement to classify ANWR as a reserve and I doubt if that would fly either. Check with your congressional delegation. If you check your history books the Navy, a while back, owned oil fields in California as a reserve in case of war. And as such they were developed and had low scale production so that the oil would be available in case of an emergency. I doubt if the environmentalists would support that, do you? If you want ANWR as insurance than the idiots would have to drill, laws would have to be changed, and some sort of conditions would have to be spelled out for under what circumstances the oil could flow.
This is going to make a lot of Floridians angry.
Regardless of all the chatter non one has addressed a solution for the short to mid term problem. All arm waving ranting and pessimism.
For the short term solution we can change the review process to streamline and get rid of redundant actions for both drilling and refining. Push exploration and drilling in the existing lease lands or re-lease them.
With these two relatively simple and low/no cost changes US production could be up well within ten years. Some have said these changes could put known but undrilled resources online within 18-24 months.
Concurrently, for the next decade, we can incentivize alternative energy solutions, alternative engine technologies,and alternative material development for auto/transportation, and Fed Govt market, private sector market, and local govt market that we have reached/passed Peak Oil Supply. It ain’t getting better.
Silas Barta (formerly Person): I don’t think I bear any responsibility for “deception” — rather I am requiring of the reader a little bit of numerical literacy, just as I expect some statistical and economic literacy.
I would like to know which graph of mine has 0.00001% decline being equated to economic collapse. If you can identify such a graph, then I will stand corrected. Anyway, like I say, if you know how natural logs work, you’ll be okay.
Environmentalist, economist and politicians must come to grips with the possibility that we may be approaching global peak oil production. (Yes exchange rates, speculation, political disruptions, terrorist threats, hurricanes and other factors can and do impact the price of oil.) Lets also acknowledge that energy has been and continues to be one of if not the key pillars of civilization, quality of life, the food supply chain and life expectancy. Lets acknowledge that high energy costs are having a major impact on the middle to lower end of the economic ladder both in the US and globally. (And this may just be the beginning of the social and economic dislocations that come with a peak oil scenario).
If there is a remote posibility that we are approaching peak oil, then politicians have a moral responsibility to develop a national energy stratgegy NOW since the solutions all require long lead times to produce results. That strategy should encourage the exploration, development and production of domestic oil and gas, as well as oil shale, tar sands and other hydro carbon sources. Our strategy should encouarge the development of alternate energies as well as nuclear power.
Development and implementation of an energy strategy now could have far reaching benefits for the American people. Delaying action could have devastating effects on our country. Doing nothing and placing scenery, wildlife and an elitist green agenda above the well being, health and quality of life of the American people is a moral failure on the part of our leadership.
Drilling ANWR now will do little to change anything. Why not leverage it for the future? It’s a pot of gold which is only going to get richer as world oil supply decreases.
The Middle East holds the cards and there is little incentive for the Saudi’s and Co. to add supply to the market when restricting that supply only increases revenue. Only ‘indirect’ threats to soverignity from disgruntled (and more powerful) consumers might force their hand. But as events in Iraq have shown this threat is largely empty, and emboldens Middle Eastern suppliers to be more restrictive in the quantity of oil made available to the world. Opening ANWR now isn’t going to alter demand for Middle Eastern oil.
From an environmental perspective, delaying drilling of ANWR will allow time for the development of more environmentally tolerant drilling practices. Drillers should be partnering with environmental groups to develop low impact and more efficient drilling technology. Further drilling is inevitable, but drillers who garner support from environmental groups will be better leveraged to win government contracts. More importantly, delayed drilling strengthens the U.S. hand as a future supplier (rather than a consumer) of world oil.
Attitudes need to change.
[1] Alternative sources of energy supply need to be developed; the cost of developing such energies becoming economically viable as oil prices increase. Whether ANWR is drilled or not doesn’t remove the political need to advance oil alternatives.
[2] Driving practices will need to change. Not just a shift to more fuel efficient vehicles, but perhaps the rejuvenation of town centers versus strip-malls; smaller cars bring other issues – not least where does all the shopping go! Will this mean big-ticket items will be sold online and delivered to the consumer’s door rather than individuals driving to Circuit City brick-and-mortar style stores to pick up their LCD TVs?
[3] Pushing R&D in fuel efficiency opens markets to China and India who face the same problems as US consumers do (chief rivals for oil demand)
[4] More importantly, increased fuel efficiency lengthens the lifetime of available ANWR resources. Why not wait until oil is at $250 or $1000 a barrel (get there it will given it’s in ever declining supply – the question is when) before drilling in ANWR? ANWR oil isn’t going anywhere soon, why rush to drill it?
Someone thought they were giving data on oil spills from drilling, but they were mistaken. This survey tablulates spills by source -http://www.api.org/statistics/accessapi/surveys/upload/2008-059_OIL_SPILLS_REPORT-2.pdf
If you read it, you will see that spills from offshore facilities have been relatively minor.
Most of the spills cited by the poster were from ship collisions – care to ban shipment of oil?
Buzzcut,
The fact that you don’t like the results of analysis doesn’t mean the analysis is disingenuous. As MC points out, your claim that “…economist wouldn’t acknowledge that prices are set at the margin…” had no basis. You claimed there was no marginal analysis. There was. Your response is to claim the marginal analysis is probably wrong. Have you checked with EIA? You mere peons could ask where EIA’s elasticity estimates come from, but you’d apparently rather just claim the other side is a bunch of meanies. Similarly, your claim that Exxon investing in alternative energy would be a “very poor reinvestment” is based on nothing that I can see. BP is a diversified energy company. Why could Exxon not be? The disingenuous claims here seem to be yours.
More time spent on honest inquiry and a less time making claims about the intellectual and character flaws of your opponents would contribute more to the discussion.
But of course, Buzzcut wants to drive his SUV and if the liberals are agin’it, he’s fer.
I drive a Saab 9-3, not an SUV.
Currently it has about 40% ethanol in the tank. You can follow my progress towards fueling this non-flex-fuel vehicle with straight up E85 here.
As MC points out, your claim that “…economist wouldn’t acknowledge that prices are set at the margin…” had no basis. You claimed there was no marginal analysis. There was.
I’m suspicious that the EIA estimate was a simple linear analysis.
If ANWR is 1.45MBPD, and world production is 85MBPD (going by John Thacker’s numbers above) and the analysis was done when oil was $40 to $80 a barrel, you get the EIA estimate of 75 cents to $1.50 a barrel. That’s where John questioned if the assumed elasticity was 1.
Does that seem right to you? It doesn’t seem right to me.
BP is a diversified energy company. Why could Exxon not be?
First of all, BP’s non-petroleum businesses are a small part of their revenue stream.
And have you looked at the relative business performance of BP to Exxon? Exxon is killing BP. Exxon is by far the best run oil company on earth, if not the best run company in any industry.
One reason that they are so well run is that they concentrate on businesses that they actually know.
Now, what expertise does a petroleum engineer have in solar cells, or wind power? Or hybrids.
Hell, even hydrogen, which refineries make in droves to hydrotreat the sulfur out of fuel, is not a business that the oil companies would have any special skill in marketing (as opposed to a Praxair or Air Liquide, which do currently market hydrogen).
More time spent on honest inquiry and a less time making claims about the intellectual and character flaws of your opponents would contribute more to the discussion.
Point taken. I appologize to Menzie for the personal comment.
The most interesting aspect of all the arguments here is the singular focus on fossil fuels and particularly oil. Yes I know that is the premise of the original article but still it seems a laser focus to this point clouds the peripheral view of alternative fuel development.
No matter the person institution or interest making the argument for continued emphasis on fossil fuel development the undeniable fact remains that such fuels are finite in supply. With finite resources when we reach the point of exhaustion for the most easily recoverable resources we see a continue rise in future pricing due to increased recover costs, and assuming continued growth in demand, pricing at the margin to reflect long term demand supply imbalance.
This imbalance may fluctuate as elasticitys fluctuate in the real world demand; however, such fluctuation will assuredly fallow a long term upward pricing trend while energy use continues to become stick on certain very real structural impediments. The graphs above fundamentally prove this true in showing first the extremely long lead time for significant new resources to be brought to market and secondly the absolute insignificance of these resource levels as demonstrated by the barrel cost impact. Indeed when worldwide energy use growth rates are considered the actual impact of these new U.S. energy sources could be far less than the minimal adjustments estimated here.
Higher energy costs do offer a positive silver lining if the opportunities are grasped. The introduction of new energy sources is the absolute solution to our current energy crisis. Higher costs today make investment in the alternative source development and distribution technologies economically viable. This current high cost environment affords opportunity to explore real alternatives and to proceed with the most promising opportunities, many of these having close in cost factors, development of production and distribution resources, that normal prohibit consideration even while possessing long term cost savings over any of the preferred fixes.
A strong, real, well supported effort in developing new fuel sources and the distribution modification or new distribution networks needed to realize the benefits of such new energy sources will have an immediate positive impact on energy pricing today. As pricing for energy commodities is set on the margins technologies threatening those margins either through immediate source increases or through extension of time to resources depletion will drive down pricing today. This policy if followed with true commitment will force all reserved energy source back onto the market in the short term, available for immediate sale and consumption as those controlling supply move to maximize their return or reserve assets.
The key within all of this is a committed energy strategy driven by the private sector, support by public policy that recognizes the need for new energy sources development not simply an attempted to develop new reserves of existing energy sources.
buzzcut: “One reason that they are so well run is that they concentrate on businesses that they actually know.”
Here’s an irony: We’re often told that companies need to better understand what business they are in. In particular what service they provide. Companies that can define the service they provide rather than the means by which that service is provided can better ride through transitions as the means changes.
If exxon is currently milking oil (a means, e.g. for transporation) they may be setting shareholders up for an eventual fall. Short term gain over long-term pain.
Just something to consider.
It’s a pot of gold which is only going to get richer as world oil supply decreases.
Are you maxed out on oil futures, then?
Hydrocarbons are formed through purely chemical processes, and given enough energy you can form them. It’s about twice as expensive as getting it out of the ground, so no one bothers right now.
M1EK seems to think I’m arguing for cheap oil or that the suburbs are awesome. But it’s merely the fact that, as oil gets more expensive, substitutes come into play. (And I don’t think $300 a barrel oil will do the suburbs any favor.)
Dan, there are no substitutes which can match the combination of EROEI and energy density of petroleum. Not even theoretical ones. Not at any economic price. No matter how expensive oil gets.
Dan Weber says, “We are still talking about a lot of money. There is probably over a trillion dollars of the stuff under ANWR..”
Re-visit the arithmetic. 2.6 billion barrels x $140/barrel is about a third of what you propose. Take away the speculative froth on this market and it’s perhaps $200B.
Buzzcut says, “I don’t think that that’s [oil spills are] the problem that it once was. There were no spills during Katrina, for example. I also think that we’re talking deep water exploration off of Florida. If the rig is 100 miles offshore, or whatever, is it really a threat to beaches?”
There have to be pipelines and tankers to bring the oil onshore. Florida has had a number of unpleasant experiences with spills. And, of course, spilled oil doesn’t magically disappear.
Floridians are pretty clear that they don’t want this. Up until relatively recently, Republican politicians did what their constituents asked.
Rich Berger says “Could you provide the top five oil spills (caused by drilling) with costs to clean up? Names and numbers, please.”
Rich, you’ve proven to my satisfaction that you have no interest in actually considering whether the other fellow might have a point, that when you’re proven wrong, instead of admitting it and learning something, you dodge.
People who actually care about the issue of cleanup costs can find estimates here. But those are underestimates, because they only cover what was spent on cleanup, not the costs to the economy, which are much more difficult to estimate.
Lost in Space, you might want to read that NYT article a little closer. It remarks that the process for converting CO2 into fuel is energy intensive.
Re-visit the arithmetic. 2.6 billion barrels x $140/barrel is about a third of what you propose. Take away the speculative froth on this market and it’s perhaps $200B.
I was using the USGS numbers, PDF here, where they give a mean value of 7.7 billion barrels. I’ll have to compare against EIA’s numbers.
I was also who you were responding to about the New York Times article. Yes, it does take a lot of electricity from nuclear power to make gasoline, but it still is a substitute once oil gets expensive enough. The process of uranium -> electricity -> gasoline -> transportation is of course quite inefficient, which is why batteries would work out much better for commuters who don’t need the range of gas.
Nuclear power’s expense is mostly involved in the construction of plants, which is why it hurts utilities so bad when they build one and then can’t turn it on. The uranium is a minor component of cost.
Rich,
Thanks for the link to the oil spill data. I have been looking for something like that.
It seems that you struck a nerve wtih Charles. The fact that only 4% (by volume) of the oil spills from offshore drilling kind of makes the muck-covered-beaches argument ring hollow, and even more so when you consider that most offshore drilling is too far out for the spill to effect the beaches.
There have to be pipelines and tankers to bring the oil onshore. Florida has had a number of unpleasant experiences with spills. And, of course, spilled oil doesn’t magically disappear.
How many of those pipelines or tankers spilled during Katrina?
I actually have a BP pipeline not 25 feet from the back of my house. My wife actually spoke to the head of BP pipelines, who came to our door once with an engineer to explain some of the work that was going on in the neighborhood. That’s pretty damn impressive, I think.
You know, I’m a bit surprised by the opposition to drilling in Florida. The energy industry provides a lot better paying jobs than the tourism industry does.
I just noticed that my link didn’t work. Sorry.
http://www.drunkenswede.blogspot.com
Dick-
You’re welcome.
As far as striking a nerve with Charles, I doubt it. I was looking for the right quote from Jonathan Swift – “It is useless to attempt to reason a man out of a thing he was never reasoned into.” But then I found another quote – “There were many times my pants were so thin I could sit on a dime and tell if it was heads or tails.” I thought Hank Williams had originally come up with a line like that. You learn something new every day, I guess.
In terms of prices might not OPEC simply neutralize additional drilling in the US by cutting back production slightly on their end?
In terms of prices might not OPEC simply neutralize additional drilling in the US by cutting back production slightly on their end?
If they were an effective cartel, yes. But at least in the past, they have not been very effective. Lots of cheating.
I do wonder why all of a sudden cheating has become less prevelant in OPEC.
Well I hope you guys are happy sending all that money to China for goods and all that money to Latin America, Canada and Middle East for oil.
Perhaps you can attract tourists to ANWR to make up for all the money you lose by leaving it in the ground?
Frankly, I am no fan of Bush at all but this predominant NIMBY attitude is totally ridiculous.
How in the world does anyone think we live so comfortably compared to a century ago. How do you think all the food is grown? Ask yourself how wars are won and lost.
One word….
RESOURCES
…look back at the history of man and you will realize that civilization is largely a story of man learning to exploit RESOURCES.
Starting with basic hand tools and fire…
For you academics merrily discussing the merits of ANWR exploitation and global warming on your computer with lithium ion batteries….do you not realize that the only reason you even exist is that society today has evolved from hunter/gathering. And this is becuause we learned a long time ago to exploit RESOURCES be it land, minerals, animals and plants and now enjoy an abundant production of food and energy.
Sure by all means continue to invest in R&D for alternatives but in the meantime exploiting what you have seems rather a no brainer!
Pretty views – pristine landscapes – what piffle.
Here’s another interesting piece:
http://tierneylab.blogs.nytimes.com/2008/06/18/offshore-drilling-v-global-warming/
The oil companies that are pushing for this energy legislation haven’t been drilling the reserves they currently own. They are simply trying to lock up oil reserves at low cost while Bush is still in office.
Currently Exxon is in a legal battle with Alaska.
The state of Alaska wants Exxon to start drilling oil reserves that Exxon has been sitting on for over 20 years.
http://uk.reuters.com/article/oilRpt/idUKN1936464220080619
The refinery issue is another pile of pork.
Currently US refineries are idling significant refining capacity, gasoline stocks are at reasonable levels and refineries are losing money due to low current profit margins, the small oil refiners are at risk of going out of business.
The last thing any oil CEO is going to do is build a new US refinery to add capacity. Furthermore COP and XOM are currently involved in building massive oil refineries in Saudi Arabia and China respectively.
Another way to look at this is to consider that simply improving US vehicle consumption from an average of say 20 miles/gallon to say 22 miles/gallon would save about 1m bpd. Naah, let’s rather destroy a sizeable wilderness area.
I also think that we’re talking deep water exploration off of Florida. If the rig is 100 miles offshore, or whatever, is it really a threat to beaches?
Yes it is actually because it can float anywhere. Plus the gulf stream loop current would take a spill anywhere in the Gulf and spread it over the entire West Coast of Florida and then across the Florida Keys.
Plus if you think about it, an oil spill in a 25 mph west wind would hit the beach in only about 4 hours anyway.
The core political debate is between those who would discourage or prevent expansion of energy production and those who want more and cheaper energy.
There have been a number of posts here supportive of higher energy taxes. I’ve pointed out repeatedly that the American public does not want higher energy bills and predicted that they will reject policies causing higher energy bills at the polls. We’ll see but many of us Republicans are smelling blood.
I do agree that ANWR is not, in itself, the total solution. But I don’t think that is the whole of the proposal either. Rather, most of the off-limit US territory would have loosened restrictions to drilling. That should prove much more effective and will answer the complaint about shipping money overseas to potential terrorist.
In the long run, nuclear should have a major role to play. While nuclear-produced hydrocarbons will never match Ghawar for EROEI and low cost of production, nothing ever has. By “long rum”, I mean 20 years for a working, first-of-a-kind prototype and 30 years for real commercial impact.
There were major oil spills resulting from Katrina.
if we drill deep enough into anwr can we deliver the oil directly to china ?
Buzzcut asks, “How many of those pipelines or tankers spilled during Katrina?”
You think tankers went out into a hurricane? Or that no preparations were made to protect pipeline infrastructure?
There were a lot of oil spills during Katrina (http://www.msnbc.msn.com/id/9365607/) 44 in southeastern Louisiana alone, with 7 million gallons spilled. That’s about two-thirds of what the Exxon Valdez dumped into Alaska’s waters.
In the winter time, if you spit in ANWR, it will freeze before it hits the ground. Yep, mighty pristine. Go spend the winter there, its -70 with no windchill.
Anyone here watch “Ice Road Truckers”? This year’s show is about delivery over the Ice to a methane Calthrate drilling operation in the Arctic. They drill only in the winter. Drill after building a frozen lake base to minimize damage to the land, etc.
Previous shows have been about deliveries to diamond mines. These mines are far, far more environmentally destructive than drilling, but there is no emotional, environmental outbursts against diamonds. Why’s that???
CoRev, editor
http://globalwarmingclearinghouse.blogspot.com
So many of these comments seem to be based on the assumption that it is good to burn more petroleum and that there is no cost of doing so.
It’s worth $5 a gallon so someone thinks it’s worth it.
True, there are externalities not included in the price but those are, IMHO, small. If you think they are too large, don’t buy gasoline, jet fuel, etc or consume products that do.
Joseph, you seem not to understand what externalities are.
Externalities are consequences that affect people outside the system. If the consequences of profligate energy use and environmental despoliation hit only the users of petroleum, perhaps that would be enough to remedy the situation.
Unfortunately, certain people get all the rewards of drilling and are able to use those rewards to shield themselves from harm. Those who are harmed the most by petroleum use are, for the most part, people too poor to buy any.
That’s what externalities are about.
buzzcut:
Isn’t it fun all the terminology we get to play with in circumstances like this.
Margin, credibility to commit, dynamic inconsistency, secure property rights, Tragedy of the commons, option value, obesity, Chronic Obstructive Pulmonary Disease, multifactor productivity, Neomarxism (a la Baran & Sweezy–it seems to be an amusing characterization of American populism), Social Capital (aka weak, poor social capital).
Then there is the cost-benefit analysis that could be performed on western army occupation of not one but three (3) Islamic territories. Here you would want to use the concept opportunity cost
buzzcut:
Isn’t it fun all the terminology we get to play with in circumstances like this.
Margin, credibility to commit, dynamic inconsistency, secure property rights, Tragedy of the commons, option value, obesity, Chronic Obstructive Pulmonary Disease, multifactor productivity, Neomarxism (a la Baran & Sweezy–it seems to be an amusing characterization of American populism), Social Capital (aka weak, poor social capital).
Then there is the cost-benefit analysis that could be performed on western army occupation of not one but three (3) Islamic territories. Here you would want to use the concept opportunity cost and revealed preference approach. (Here is a skill-testing question for you: Who is paying the highest economic cost for lands, relgious monuments and water taken by Israel in 1967?
I haven’t crunched the numbers but my back of the hand guestimates suggest that the shortfall in production in three Islamic producers of high-grade, low-supher content crude liquid is also as good an explanation of current high, real oil prices as the reduction in Saudi sales over the past 2 years.
If some of you good folks sincerely hold a high willingness to pay for appropriated resources in the ME measured in the blood of Arabs, Israeli Jews and your North American neighbours, why don’t you have the courage to come out and just say so. Example: “For me, Jerusalem under European control is worth 3 dead (American) neighbours and trillions of dollars in imported oil.”
Revealed preference you say? In the world of killing and stealing, the US and Israel are the last remaining traditional aggressive, European colonial powers. Do the other former European colonial powers know something that Americans and Israelis have yet to figure out?
If I may comment as a long-horizon resource-specialized investor: I could frankly care less if ANWAR is opened up or not.
However, I read the threads where the loudest voices appear to preach: “hear no evil, see no evil”, and, at all costs, avoid tough demand-side decisions–in this blog and elsewhere–and it encourages me to increase my already large exposure to oil & natural gas.
There are a number of policy measures the US government could take that would end this energy bull market for investors in the blink of an eye. I am heartened and encouraged that nobody is considering these measures seriously.
Charles,
You didn’t comprehend what I wrote. Perhaps it was too subtle a thought.
Externalities are subject to estimation. Some people would exaggerate beyond observation or reason the harm to prove their own political point and to synthesize an ad hominem insult. Sometimes a broad consensus can be obtained to curtail a real problem and suitable laws can be enacted.
I estimate that my use (and society’s) of petroleum products produces trivial externalities given the value delivered using current technology and regulatory processes. I see reason to change neither my ways nor the laws.
Given my estimation of the cost/benefit ratio I advocate no change. You can advocate as you will but if you disagree, your first course is to forgo the personal use of petroleum products. Frankly, I don’t care.
Moral Hazard is the economic term most applicable to the current energy and broader economic crisis.
We have delayed, dodged, disabused our selves of, and disastrously ignored the reality of finite supplies for fossil fuel energy to a point that we now face a future poorly planned for. The U.S. government and its’ interventionist policies throughout the oil producing world has lulled the general populist into a belief that all fuel shortages are aberrations in the markets that will be corrected through strong armed U.S. policy.
In a zeal to protect the existing manufacturing infrastructure of the U.S. cheap fuels have become a linchpin to securing the status quo. Unfortunately while we have basked in the glory of an artificial economy powered by unrealistic fuel pricing and the high octane boost of grossly skewed interest rates our core economic value on the world stage has dimmed and now flickers weakly.
When you purposely cause markets to bend to unrealistic economics you pay the longer term price of developing industries and infrastructures that at the point of realignment to reality are entirely out of step with the demands and preferences of the world economy.
The auto industries production of unsupportable vehicle types, large trucks and SUV’s, and development of manufacturing infrastructures now needs years to retool for competition. The question now is will the U.S. have a national auto producer in five years.
Housing markets that reflected the potential long term resales price based on continued hyper demand growth to justify lending practices that would make PONZI proud are yet another of the market distortion ignoring the finite nature of resources.
The core issue is not how much more and how quickly can we bring more fossil fuel production on line. Draining a finite resources faster will not provide more longterm pricing stability. Indeed economic theory tells us such policies will provide the foundation for even higher levels of pricing. The core issue is how do the U.S., Europe, China, India, Japan and developing nation shift to a new energy policy. The world leader of the future will be that nation not in fear of its’ next sip of gas.
Joseph Somsel says, “Externalities are subject to estimation. … I estimate that my use (and society’s) of petroleum products produces trivial externalities given the value delivered using current technology and regulatory processes. I see reason to change neither my ways nor the laws.”
Yes, it’s one of those situations where the overwhelming majority of scientists in the relevant disciplines and top economists think the costs are high and the oil and coal companies and people who believe the “research” they produce are think the costs are low. Who could possibly decide between the two?
As for my tone in commenting on your implicit assertion that there are externalities included in the price, I thought I was being very polite, considering.
Externalities may be considered in the choice, as known by the one deciding, but are not reflected in the price. (See “boycott.”) My first exposures to the concept of externalities was in a class on “Politics of the Environment” in 1976 and working with Howard Odum on energy modeling.
I don’t see any “overwhelming majority of scientists” declaring externalities of fossil fuel use as too high. I do see where that NASA bureaucrat Hansen wants to put people who disagree with him on trial. I do see a vigorous scientific and political debate going on that is no way resolved – science never is. Political calls to immediate draconian actions are premature and suggest a lack of confidence in the underlying scientific understanding.
But that’s not the way issues involving government action are resolved in a democracy. “Scientists” are not empowered to impose taxes and quotas on people’s actions. There are tradeoffs involved and scientists don’t have any special expertise or even power to decide for everyone. Only voters have the power to elect representatives who make those decisions.
Granted, coal is dirty and we are consuming more oil and natural gas than we are finding. My personal career is about moving beyond fossil fuels – I’ve done my part in the real world.
Looking back at my original post and I can see that it was a bit too succinct.
Joseph Somsel: I am curious. Do you have a calculation that you can share of the externalities associated with burning fossil fuels. Or are they based on some (published) estimates? This is not a rhetorical question. I think the progress of knowledge can only be served by the exchange of methodologies and analyses.
Professor Chinn,
That is a good question. I’ll write to your email with more today or tomorrow.
There are global and local estimates of life-shortening from pollution. The regulatory regime makes a big difference – health effects from burning coal in China for the Chinese population are much more intensive than burning coal in a new power plant in the US. Mining coal in the US is much safer than mining coal in China too.
For C02 emissions, the UN’s IPCC report I read (the 2001 edition; not the summaries written by the politicians) summarizes the “forcing factors” for CO2, solar variation, volcanic action, etc. on climate. The activities of man from additional CO2 are swamped in the natural “noise” of factors driving climate. Feedback loops are poorly understood – a prime example is water vapor and cloud cover.
Of course, nuclear takes the prize for low externalities. (I do find myself ill at ease defending coal and oil!)
There are costs and there are benefits. To summarize the benefits, consider the life expectancy of current cultures that are not using fossil fuel subsidies and those that do. People live longer, safer, more comfortable lives with exogenous energy.
People will do some painful things if the rewards are deemed to be worth it.
Joseph Somsel says, “Externalities may be considered in the choice, as known by the one deciding, but are not reflected in the price. (See “boycott.”)”
Joseph, not to be pissy, but you implied that there are externalities reflected in the price. I don’t care who you studied under and I am less than impressed by people who flaunt credentials, this is by definition wrong. That’s all I am saying.
Now, your statement that “I don’t see any “overwhelming majority of scientists” declaring externalities of fossil fuel use as too high,” may be true, but if true, implies that you have no idea what is going on in science. Both AAAS and NAS have come out stating that global warming is threat to this country. These are the premier scientific organizations and they do reflect what their members think. AAAS has 10 million members worldwide.
IMHO, the best time to drill in ANWR would be when oil is so scarce and valuable that China’s thinking about invading Alaska and taking it.
Calling for ANWR to be tapped now is like running out of Corona and demanding that the Macallan 1926 be opened up.
Charles wrote: “In the winter time, if you spit in ANWR, it will freeze before it hits the ground. Yep, mighty pristine”
pristine means ‘unspoiled’ not ‘pleasant’ or ‘desirable vacation spot’.
I expect there are parts of your anatomy that aren’t particularly pretty, but which you’d prefer to remain pristine.
Just to be clear, there are two people posting as Charles in this thread. That silly comment about spitting was from a drive-by poster, not from Charles of MercuryRising(www.phoenixwoman.wordpress.com).
Does Chinn Drilling hold any gas leases in Rusk County, Texas, particularly west of Henderson in the Price, Texas area?
John McCain to support drilling in ANWR, biggest news from Palin/Gipson interview.
http://strategicthought-charles77.blogspot.com/2008/09/john-mccain-to-support-drilling-in-anwr.html